Urban Outfitters, Inc. (URBN) Q3 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Urban Outfitters Inc. Third Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce the call to Oona McCullough, Director of Investor Relations. Ms. McCullough, you may begin.

Good afternoon, and welcome to the URBN third quarter fiscal 2021 conference call. Earlier this afternoon, the company issued a press release outlining the financial and operating results for the three and nine-month periods ending October 31, 2020. The following discussions may include forward-looking statements. It’s important to note at this time, the global COVID-19 pandemic has had and continues to have a significant material impact on URBN’s business. Given an extremely high level of uncertainty about the duration and extent of the virus’ near and long-term impact to the global retail environment, content discussed on today’s call could change materially at any time. Accordingly, future results could differ materially from historical practices and results or current descriptions, estimates and suggestions. Additional information concerning factors that could cause actual results to differ materially from projected results is contained in the company’s filings with the Securities and Exchange Commission. On today’s call you will hear from Frank Conforti, Co-President, URBN; Trish Donnelly, Global CEO, Urban Outfitters Group; and Richard Hayne, Chief Executive Officer, URBN. Following that, we will be pleased to address your questions. For more detailed commentary on our quarterly performance and the text of today’s conference call, please refer to our investor relations website at www.urbn.com. I will now turn the call over to Frank.

Thank you, Oona, and good afternoon everyone. It continues to be a year full of challenges, and I believe we continue to meet them head on. All three brands delivered sales improvement from Q2 and recorded lower Q3 markdown rates versus last year. We produced a new record low markdown rate for the third quarter, which helped to drive nearly $100 million of operating profit and an op profit rate above 10%. Our balance sheet remains strong as we paid down the remaining $120 million on our outstanding line of credit and ended the quarter with $634 million in cash and marketable securities. Each brand controlled inventories well and ended the quarter with inventory below their sales performance. I have said it before and I don’t mind saying it again, during an incredibly difficult environment, we could not be more proud of the teams and their exceptional execution. Before I speak about our upcoming quarter, please note, there remains a high level of external uncertainty. The number of COVID cases are spiking at home and around the globe, resulting in more government restrictions. So, as you can imagine, our current views could change at any time. Now, as we enter the fourth quarter of fiscal year 2021, it may be helpful for you to consider the following: Quarter-to-date, our sales are reasonably in line with where we finished the third quarter. Store sales have slowed slightly, while the digital demand has accelerated slightly. As already noted, there is a ton of uncertainty in the consumer behavior for the holiday season. Therefore, we are not forecasting where we believe sales will land for the quarter. If sales performance for Q4 were to remain fairly consistent with the third quarter, we believe URBN’s gross margin rate for the fourth quarter would deleverage. Please note that I am referencing Q4 gross profit margin versus last year, excluding the store impairment charges recorded in the fourth quarter in the prior year. The decrease in Q4 margin versus the prior year would primarily be due to increased delivery and logistics expense. This deleverage in delivery and logistics expense rate would be due, in part, to the increased penetration of the digital channel, as well as increased costs to meet the strong digital consumer demand. This deleverage will not be fully offset by the digital penetration benefit in store occupancy due to negative store ‘comps’ persisting and possibly getting worse than the third quarter result. Many of you may question how our gross profit rate could decline in the fourth quarter given our strong margin performance in the third quarter. First and foremost, this is about delivery expense. We anticipate delivery expense will deleverage significantly more in the fourth quarter than it did in Q3. Three items would cause the deleverage: first, the increase in penetration of the digital channel; second, an increase in carrier rates; and third the need for an increased amount of expedited shipping to ensure packages arrive on time. As many of you are aware, the delivery demand is at or above network capacity in the United States. Knowing that our existing carriers will be unable to fully meet our demand, we have added additional regional carriers in an attempt to get shipments to our consumers on time. Besides delivery, the other item that could contribute to a lower gross profit margin in Q4 is the markdown rate. In the third quarter, all three brands had favorable year-over-year markdown rates with Urban Outfitters and Free People delivering exceptionally low rates. This helped to drive a record low Q3 rate for URBN. With the uncertainty around the holiday season, especially in the store channel, we are anticipating markdowns in the fourth quarter to be less exceptional. Now, moving on to SG&A. Based on our current sales performance and our current plan, we believe SG&A could decline for the fourth quarter resulting in SG&A leverage versus last year. We continue to manage our expenses tightly, while closely monitoring our topline performance. We are currently planning our effective tax rate for the fourth quarter to be fairly consistent with the third quarter. Capital expenditures for the fiscal year are planned at approximately $195 million. The spend is primarily related to expanded distribution facilities, including the completion of our new omnichannel distribution facility in the UK and the start of construction on a new facility in the U.S. As a reminder, the forgoing does not constitute a forecast, but is simply a reflection of our current views. The company disclaims any obligation to update forward-looking statements. Now, I am pleased to turn the call over to Trish Donnelly, Global CEO of the Urban Outfitters brand.

Thank you, Frank, and good afternoon everyone. I am excited to report the Urban Outfitters Brand delivered a positive 4% global retail segment comp for the third quarter. These comps were driven by exceptional growth in the digital channels in North America and Europe, partially offset by more challenging comps in the store channel. Well-controlled inventory management enabled historically low markdown rates and fast inventory turns. This, coupled with disciplined expense management, led to operating income double that of last year. As I mentioned, the positive global retail comp was driven by our digital channel. All global KPIs, sessions, conversion, and average order value saw impressive increases over last year. All geographical sectors, Americas, Europe, APAC, Middle East and AU/NZ saw positive double-digit ‘comps.’ In addition, every marketing channel, paid and unpaid, positive comped to last year. Most impressive was ‘new’ customer growth in the digital channel. Globally, we gained 36% more customers over last year with both North America and Europe picking up hundreds of thousands of new customers during the quarter. In addition, we launched a new Urban Outfitters website in Mexico and the early results are very exciting. Turning to the retail store channel, despite the obvious COVID-related challenges, the field teams drove impressive increases in both conversion and average transaction value, which helped offset some of the traffic declines. Our retail stores optimized their pick, pack, and ship capabilities and were able to fill close to one million direct-to-consumer units out of store inventories, globally. In addition, we launched ‘UO to GO’, our curbside pick-up capability, which continues to gain traction as we move into holiday. Other bright spots within the retail channel this quarter included the opening of our Urban Outfitters flagship store in Munich, as well as an iets Frans pop-up shop on Carnaby Street in London. On the North America side, we opened a new store in Sarasota, FL, and relocated our store in Omaha, Nebraska. Strong topline sales were driven by positive customer response to our product assortment and allowed for historic, full price selling rates across a number of categories. While the women’s businesses were key to the success of the quarter, the Home business experienced the highest growth rates. Our speed-to-customer/chase model allowed the teams to react to reads from Q2, pivot quickly, and distort into trending categories for Q3. At the beginning of Q2, we started to see notable shifts in customer behavior. On the apparel side, structured product gave way to comfort and the teams quickly chased and distorted buys for Q3 into casual and cozy tops, bottoms, and third pieces in both men’s and women’s. We also saw our customer shift their attention to our Home areas, whether they needed furniture and storage to set up work from home spaces, new bedding or textiles with which to decorate their apartments or houses, bakeware and drinkware to support a newfound love of kitchen and DIY, games and puzzles, both tech and non-tech, as entertainment, or music, listening to or playing, our complex merchandising model catered to needs in all facets of our 18-year to 26-year old core customers’ evolving interests. The efforts from the merchants, planners, and designers on the product side were buoyed by relevant and compelling marketing campaigns. The marketing teams immediately channeled our customers ‘mindsets’ and created meaningful marketing messages to support our product strategies. Our ‘UO at Home’ campaign drove growth and excitement to the business. By featuring over 200 global influencers and creators, from Paris to Copenhagen and Los Angeles to Miami, these diverse individuals photographed themselves in Urban Outfitters product within their local environments, capturing their lifestyles, their interests, and creative expressions. This wide range of creative assets, reinforcing UO’s ‘big ideas’ and ‘key product categories’ felt authentic, familiar, and it resonated with our customers. We not only saw this in increased engagement and following on our social platforms, particularly Instagram, Pinterest, and TikTok, but we also saw increases in sales within the categories and the items we highlighted. Another new marketing method we quickly adopted was hosting virtual experiences for our customers. Virtual dance and workout classes, DIY workshops, live performance concerts, and beauty tutorials were some of our most successful, with thousands of customer sign-ups. And lastly, to further our customer connection, we partnered with the ‘I AM A VOTER’ campaign to help our customers navigate the 2020 election and inspire all to get involved, stay aware, and to vote. We created exclusive Ballot Box Tee kits and emerged as a brand leader in encouraging the youth vote. In closing, the third quarter was an exciting one for the Urban Outfitters brand. We will continue our focus on the customer from a product standpoint and will continue our fiscal diligence around inventory control. The last eight months have forced our team to re-evaluate how we operate and how we continue to please the customer. The operational competencies we’ve developed this past quarter in the retail channel around DTC order fulfillment will certainly prove beneficial this holiday season. The team’s ability to quickly pivot and give our customers relevant product; best-in-class marketing; innovative digital experiences; and personalized service in stores were critical in driving these results. I would like to thank Meg, the Urban Outfitters leadership team, our home office and our field teams. Thank you. I will now turn the call over to Dick.

Thanks Trish. Wow, what a phenomenal quarter. Strong ‘comps’, lean inventories, low markdowns, and well-controlled expenses, all leading to a 100% jump in operating profits. Truly a great, great effort. Thanks, and congratulations to you, Meg and the entire Urban team. Good afternoon everyone. Today, I will discuss our overall results for the third quarter, talk about performance by channel, then by brand, and give my thoughts on the holiday season, before turning the call over for your questions. I am pleased to report URBN produced healthy revenues and excellent operating profits for Q3 versus the same quarter last year. Total ‘comp’ sales were flat, but operating profits soared 31%. In addition, all large brands were profitable and together they delivered the lowest Q3 markdown rate and best full price selling in URBN history. This is a tremendous accomplishment given the environment we faced. Let me now recap performance by channel, beginning with stores. Not surprisingly, the store channel at all brands struggled again in the third quarter. Compared to the previous quarter, ‘comps’ did improve, but stores still faced punishing traffic declines, particularly our high-volume stores in large cities like New York, London and San Francisco. All stores were open for business, but most were either forced to obey crippling occupancy caps or observe restrictions in hours of operation and sometimes both. The impact of low traffic on sales was partially offset by strong conversion increases as the shoppers that did visit, came with intent. In August, when we last spoke, store traffic had improved slightly from July, and we saw that improvement continue, at a frustratingly slow pace through the middle of October. Since the third week in October, we’ve seen a slight reversal with lighter traffic as viral caseloads spiked and restrictions were reinstalled. Fortunately, store channel weakness in Q3 was offset by outsized strength in digital demand. Our overall digital business posted robust mid-double-digit ‘comp’ sales in each month of the quarter and that strength has continued in the fourth quarter, to date. Sessions, orders, and conversion all saw powerful increases across all three brands and total new digital customers in the quarter jumped by 45%. Since May of this year, our fulfillment centers have experienced non-stop holiday level workloads and have done an exceptional job of maintaining customer service levels. Turning to a review by brand, beginning with Anthropologie. Of our three main brands, Anthropologie has been most harshly impacted by the pandemic. Anthro is known for offering more structured apparel appropriate for social interactions outside the home. Obviously, the virus has curtailed those interactions and thus the need for apparel that supports them. The apparel team has seen some success in adjusting the assortments to have a higher penetration of casual ‘at home’ clothing. While this led to better ‘comps’ in the third quarter versus the second quarter, when compared to Q3 last year, apparel remains negative for two primary reasons: first, the average price of a casual item is significantly less than most structured items, and second, more markdowns were needed to clear less desirable products. We believe the Anthro apparel category will likely remain challenged through the remainder of FY 2021. Conversely, the AnthroLiving home category enjoyed one of its most productive quarters ever, generating strong, double-digit ‘comp’ sales, largely at regular price. As apparel sales suffer from a lack of social interaction, the home category benefits from ‘stay at home’ regulations. Holiday gift giving typically boosts the penetration of home sales during Q4, and since home product is performing well, we believe Anthropologie could produce better retail segment ‘comps’ despite continued softness in apparel sales. Even though total sales were disappointing, Anthropologie engineered a very respectable operating profit for the quarter, driven by tight expense management and well-controlled inventory levels. The brand entered Q4 with total inventory down 14% at cost. I thank Hillary, Meg, and the Anthropologie team for driving the improvement in third quarter results. The team has done a good job of mitigating the virus-induced impacts and keeping the brand profitable. Now turning to Free People. What a quarter this brand delivered! Retail segment ‘comps’ surged 17% driven by exceptional growth in digital demand. Since COVID, Free People has greatly benefitted from having the highest digital penetration in our portfolio of brands. In the third quarter that penetration topped 70%. For the quarter, all Free People product categories posted positive ‘comps’ and strong regular price selling. This produced a near-record low Q3 mark-down rate for the brand. Within categories, none was more impressive than FP Movement, which delivered triple digit ‘comp’ increases. Sales of Movement product were even ‘comp’ positive in the struggling store and wholesale channels. We are pleased to announce that in mid-October we successfully opened our first stand-alone Movement store in Century City, California. We are encouraged by early results, which have tracked nicely ahead of plan. A second Movement store is slated to open later this month in Boulder, Colorado. We expect to open additional stores next year and believe Movement has the potential to become a billion-dollar brand and plan to invest in its growth aggressively. Free People sales in the wholesale channel dropped by 23% against Q3 last year. That represents a strong rebound from Q2’s 52% decrease. Each wholesale segment, specialty stores, department stores and closeout outlets registered similar declines. Sales declined, but profits showed strong improvement and were nicely positive as the brand issued far fewer discounts and allowances. My thanks go to Sheila, Meg, and the Free People team. The powerful quarter you produced is a wonderful tribute to your leadership and the talent and tenacity of your team. Well done. In Q3, our subscription rental brand Nuuly, passed its one-year mark. After suffering relatively high pauses in customer subscriptions in the early days of COVID, Nuuly has seen a gradual reengagement from subscribers who were on pause. Overall, Nuuly has seen a 75% increase in active paying subscribers since the lows recorded in mid-May, and subscribers have been purchasing their rented products at almost twice the pre-COVID rate. In all, we remain optimistic about the future of rental post-COVID. In any other year, coming off such a strong third quarter with exceptional product execution and positive customer response to early holiday assortments, would make us highly confident about holiday results. It goes without saying, 2020 is not like any other year and our confidence is tempered by external risks beyond our control. In recent weeks, governments in some regions such as the UK have returned to strict lockdowns and an increasing number of states and local municipalities have re-imposed draconian store capacity restrictions and stay-at-home orders. These actions insert a significant amount of uncertainty into our business for the weeks leading up to beyond Christmas. We’re confident that our brands are executing well. We know our products and marketing messages are compelling. Most importantly in this environment, we’re highly confident in our well-developed digital capabilities. These enable us to capture consumer demand even when stores are challenged by external restrictions. Turning to our current business, total company sales-to-date in Q4 are essentially in-line with our third quarter results. Stores have de-accelerated slightly due to new restrictions, and the digital channel has improved slightly. As with everything else in the year 2020, the situation is highly fluid, so accurately predicting holiday sales is a low-confidence proposition that I’ll avoid. We do anticipate a surge in digital demand in the coming weeks. To address that we’ve taken extra measures to help scale with demand, including: increasing fulfillment center staffing levels versus last holiday, installing more automation equipment in those centers to help boost productivity, staffing stores to allow for more pack and ship processing, and launching curbside pick-up in stores where it’s practical. As Frank pointed out, we are also concerned about the capacity constraints of our delivery carriers. To mitigate that risk, we’ve added more regional firms to our network. Our goal remains to be able to please customers no matter how, when or where they shop with us. Before turning the call over to your questions, I want to thank our Co-Presidents, all brand and shared service leaders, their teams, and all associates world-wide. It has been a long and difficult year, but I’m incredibly proud of our teams, how hard they’ve worked, and the amazing results they’ve produced. They have shown grit and determination and have excelled in what has been the most difficult environment I can remember. Our positive performance is a direct reflection of our teams’ will to make it happen. So, thank you. Thanks also to our many partners and their workers around the world who went above and beyond to produce our products, often under the most trying of circumstances. Finally, thanks to our shareholders, especially our longer-term investors, for your continued support. That concludes my prepared remarks. Now, for your questions.

Ladies and gentlemen, before our question and answer session, I would like to turn the call over to Dick Hayne for comments.

Thank you very much and thank you all for joining the call tonight. Before we answer your questions, I just want to reiterate what both Frank and I have said on our prepared remarks and that is the answers to today’s questions that speak to the future outcomes will be based on current information only and our current view of the future. Right now, the external environment is volatile and highly uncertain. For instance, there is no way for us to know if COVID cases will continue to spike or retreat over the coming weeks. Likewise, it’s impossible for us to factor in possible future government lockdowns or store restrictions. Both could have a big impact on our fourth quarter results. Therefore, please understand that our answers today reflect plans developed from what we currently know and actual results could be very different, if the environment changes. With that, I’m happy to tell you where we stand today as we enter Thanksgiving week. Total retail segment comp sales for November to date are essentially flat with our Q3 comp level. Store traffic and comps have softened slightly over the last few weeks. We currently have 68 stores closed to the public due to COVID-related restrictions. 55 of those stores are in Europe, 11 in Canada, and two in the U.S. Of the stores that remain open, 158 or almost a third of our North American fleet are operating with capacity restrictions under 50% of legal occupancy. All stores are currently permitted to pack and ship digital orders. Digital demand on the other hand has improved and offset the dip in store sales. This is especially true in the U.K. where our current digital business is producing triple-digit comps. With that, we will now be glad to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Kimberly Greenberger with Morgan Stanley.

Okay, great. So, sorry Dick, at the very end there, did you say triple digit digital growth?

I did say that Kimberly.

I swear I wrote it down wrong.

Now, but listen the stores are closed and as an example of how unpredictable this environment is, we just got word this morning that the stores will be able to reopen on December 3. But in the meantime, we are experiencing triple digit growth in our digital. Thank God, we have opened a new fulfillment center in Peterborough, UK. And because of that fulfillment center, we have the capacity to fill triple digit increases.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

Well, thanks. Good afternoon. Frank, I just wanted to ask you about the balance sheet, you have more cash on hand than you did at this time last year and now you’ve paid down your debt. Can you talk about the potential to resume the buyback and then also how we should be thinking about CapEx next year and beyond?

Yes, Lorraine. So, I think right now, given the uncertainty Dick and I have talked about in the fourth quarter, we feel it's prudent to remain flexible and conservative with our cash and our marketable securities. As you know, we always focus on the cash needs, sort of in the same order, supporting our business, investing in our growth based initiatives and then returning cash to shareholders. We do have a Board meeting coming up next week. And as always, I'm sure capital allocation will be a topic of conversation as a Board meeting itself. We did kick off a new distribution facility that we're going to be building here in North America. I think we actually broke ground on that today in Kansas. That will impact our capital number next year. We don't have a final number in and of itself. We just completed our facility in the UK, and we will be building a new facility next year. We're excited about both of these facilities as Dick said and they both enabled us to continue to support the strong digital demand and growth that we're seeing, and we're excited to be able to continue invest in the business.

Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.

Okay.

Hi Kimberly, sorry we cut you off.

Yeah, no, no problem. I just wanted to clarify that. I wanted to ask just about digital delivery this holiday season, and, you know, obviously there's been some ongoing deleverage in digital delivery, because digital is rising as a percentage of sales. And I wanted to ask, there are some one-time impacts come into the fourth quarter? Can you lay out some of the strategies for us that you're using to make sure that you can get product to consumers and any strategies to offset those costs? As we look to next year, what do you think – what sort of digital delivery cost increases would you expect to be sustained as opposed to which ones are more temporary? Thank you.

Okay, Kimberly, I'll take a shot at that. You're right. We're seeing very strong digital. As I said, in my prepared remarks, mid-double-digit sales growth in the digital channel. And when this started in May, you know, we all sat around and said, this could easily continue through holiday. And, gosh, what are we going to do to fulfill those orders. So, we put together a plan, which included increasing the staffing in the fulfill – all the fulfillment centers, beyond what we've done in prior holidays, incentivizing the fulfillment staff by offering additional bonuses and rewards, that are based on performance metrics and attendance, we installed some additional equipment, that is to increase our efficiency and throughput and productivity, we take in some of the newly distribution center space, and converted that into an area to process some of the fast turning holiday items. And we provided additional labor hours in stores, to enable them to handle more pick pack and ship orders. And also in the stores allowed for curbside pickup, where it's practical. So we've done a lot of – taken a lot of steps to be able to handle the surge in demand. And I have to tell you, that fulfillment center has been working, basically holiday shifts since May, and has done an excellent job of performing. And whenever we have any COVID-related issues in those fulfillment centers, Dave [indiscernible] and his staff have taken care of it so we can get right back in and keep working and they've done a great job. What have we seen in the – through the future? Well, I guess you'd have to tell me where you – when you see COVID dying down or going away. After it goes away, I think things will return a bit to more normal charges for delivery. And so, if you think that's going to happen in the first quarter, second quarter, third quarter, that's when we expect to see it. Until that happens and the stores are continued challenged, I would suggest that the direct business will remain very elevated. The carriers will all have a problem fulfilling that volume and will continue to charge more. That's how I see it. Frank, do you have anything to add to that?

I just want to add, Kimberly as it relates to just being able to meet the holiday volume in addition to all the measures Dick talked about from a fulfillment perspective we did go ahead and add additional regional carriers as well to increase our capacity within the network. I also want to highlight, which – it was in my prepared commentary, the biggest delta between how we're looking at Q3 gross profit margin versus Q4 gross profit margin really is about what Dick is talking about, about the increased carrier rates in the fourth quarter in order – and those surcharges related to the demand that the delivery network is expecting to experience in the fourth quarter, as well as us as a company anticipating a higher rate of expedited shipments in order to ensure that she gets her package on time.

Your next question comes from the line of Matthew Boss with JP Morgan.

Great, thanks and congrats on the improvement. So, maybe Frank, could you help break down same store sales trends by brand in November? And then Dick, just following the sheltered consumer for months now, what's your sense on a fashion cycle potentially emerging on the other side of this crisis? And how are you positioning the brands today to take advantage of that, if that is, in fact the case?

So Matt, I'll take the first one. And we don't give out the same store sales numbers by brand, but as Dick did highlight in his prepared commentary over the last week or so of October, as well as the early weeks in November, we did see a decline in traffic and a slight decline in corresponding decline in our store comps and that has impacted all brands fairly consistently. And offsetting that has been a slight improvement in the digital demand enabling us to be flat where – which Dick mentioned earlier on the call.

Okay, sheltered consumer. I like that term. I guess the first thing I'd say is, we think that the free people in Urban brands, right now are already taking advantage of fashion demand. And I would encourage both of those brands to just keep doing what they did in the third quarter. Having said that, anthropology, as I suggested, my prepared comments, is known for structured apparel that's appropriate for occasions outside the home, like work dining out events, like graduate graduations, weddings, and parties. We believe post-COVID, whenever that comes, these events will return in full, and I think with vengeance. If you just look at something like weddings, there have been a significant drop-off in the number of weddings and the size of those weddings. And we believe there's a big demand building up for either weddings, or the people who did get married during COVID to have follow-up parties where they can invite lots of people. So, we think there's going to be a lot of events once it's safe. And we think that anthropology is well-positioned to take advantage of those events, and that social interaction outside the home. So, once it's over, we think the Anthropologie signature look will be back in high demand. Now, when that happens, is – I guess the, as they used to say, the million dollar question, and it's something that we can answer, but we obviously are being conscious about pivoting back too early, which would just cause a lot of markdowns.

Your next question comes from the line of Adrian Yee with Barclays.

Good afternoon, and let me add my congratulations, very well done. So, tough out there.

Thank you.

You're welcome. Trish, I was wondering if we can focus on the success of, you know, UO as one of the big core brands, how has the U.S. in the UO business permanently changed regarding inventory management, stocking level, and size and breadth of the store offering? And then Frank as we think about next year and this notion of a mean reversion of sales back into stores? Where should we be thinking of the brick and mortar to e-commerce split and the breakeven leverage point for stores? Thank you so much.

Hey, Adrian, it's Trish. In terms of permanent changes to how we’ve managed inventory, there's really nothing we've done differently. I think what the teams have done really well is taking that inventory that we do have and distorting into things that are working, and we had some really strong business in women's, and as I mentioned in my commentary, our highest growth rates for in home, and our ability to pivot into those categories that that were working during COVID, you know, obviously was really good for the business. But in terms of any, you know, permanent changes to inventory, we still manage on the same type [for weeks] to supply that we always have. And I'll toss it over to Frank for the rest of that question.

Hi, Adrian. Unfortunately, I just don't have a lot of visibility on exactly what our model is going to look like going forward. I can tell you that we've modeled many different channel penetration scenarios, but which one comes true right now is really going to depend on the consumer. With that said, yes, we certainly believe the ongoing digital adoption we've seen over the last decade has definitely accelerated during the COVID outbreak, but to what extent, we just don't know. What we do know is we have strong brands, and we have a strong connect and those brands have a strong connection to the customer. We've got excellent operational capabilities and a strong balance sheet. So, honestly, however, the consumer wants to settle in from a shopping channel perspective, we will adjust accordingly. And I think we've done a very good job at quickly adapting this year. And you can expect the same from us in the future.

Your next question comes from the line of Janet Kloppenburg with JJK Research.

Congratulations. Nice job. Frank, I was wondering if you could talk a little bit about the positive influence of the rent concessions and the government assistance on gross margin, and if that will be a positive influence in the fourth quarter? And to what degree sequentially? And also if lower clearance levels given your inventory levels may also positively influence the fourth quarter gross margin? And in Dick, I know, this is a tough question, but as you think about the pandemic, and the recent news on vaccines, how do you think about planning, sales and inventories for next year? And, you know, when do you expect a nice rebound to emerge? Thanks.

Janet, this is Frank, so you're 100% correct. There were rent abatements recorded in the third quarter, as well as government benefits really in Europe as it relates to real estate taxes. We do have some of those deals yet to complete that will favorably benefit the fourth quarter as well. With that being said, none of those were anywhere near the materiality of what drove our gross profit margin improvement in the quarter. It really was led by record low merch markdown rates with all three brands recording lower markdown rate on a year-over-year basis, as well as our wholesale segment recording favorable merch margins on a year-over-year basis. That's really what led the way for us in driving improvement in the Q3 margin.

Okay, Janet, planning sales and inventory for FY 2022. Yeah, you did give me a tough one there young lady. When we think about it, we clearly don't know when this vaccine is going to become available. We don't know when it does become available, at what rate it will be available, and we also don't know how quickly the uptake will be from the consumers in this country. So, it's a very, very difficult question to answer about when we might see a return to I guess what we would put in quotes normalcy. How are we planning? We're really planning our spring-summer business on an omni-channel level because we don't know with what the store channel will bring and we don't know what the digital channel would bring, but we're – have some degree of confidence around what the total will bring and I say some degree of confidence. So we plan on an omni-channel and we order inventory to that omni-channel level and then as it gets closer to the point in time we can split the inventory up to go to whichever channel the consumers are favoring. So, I don't know of any other way to do it without the potential of making really gross mistakes.

Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Hey, guys, congratulations. And in case I forget, stores look really fantastic, particularly Urban has been just a lot of fun.

Thanks Marni.

Could you talk a little bit, you've had a pretty dramatic shift to DTC and Free People was already there. Can you talk about the differences you've seen in the Urban customer and the Anthro customer shifting online. Did they both move very quickly and have they both stayed there or did you see differences there as to how that sort of transpired over the last couple of months?

I don't think that there’s been many differences at all. The Urban and Anthropologie customers have shifted just about the same – at the same rate that the Free People customer has, it's just that the stores are larger and they are more impactful and there's more of them. So the penetration of stores for Urban and Anthropologie is greater, but overall, we see them – all three brands we see them definitely migrating to digital. And I do have to tell you that while our inventories have been extremely well controlled, in some cases, they are almost too well controlled, we could have benefited pretty greatly by having a little more home product. Right now, I think we're sitting at around $26 million in back orders, which is primarily in home and a lot of that home product is Anthropologie home, but we don't see much difference in the usage of digital.

Your last question comes from the line of Mark Altschwager with Baird.

Good evening. Thanks for taking my question and congrats on the quarter. First, a quick follow-up on the rent concession topic, I'm wondering if there's any update you can share on maybe any bigger picture changes that are happening to rent structures and how that might change the margin algorithm from here in terms of leverage points on store comps and then I wanted to ask more broadly about just growth investments. Balance sheet remains in great shape, appears to be light at the end of the tunnel with a vaccine on the way. I'm just wondering how you're thinking about ratcheting back up growth investments, China, Europe, Free People Movement, wholesale for the various brands, Nuuly, it would seem that there is a lot of levers there. Maybe if you could you just rank order how you're thinking about those over the next couple of years? Thanks.

So, is that all, Mark? Let me start with rent. So, I really look at rent in two buckets, one related to the pandemic itself. I think we focus really heavily on being able to achieve rent abatement for the periods that we were closed or significantly restricted from an occupancy perspective and I think we did a great job and we had good partners on the other side as well getting to help the abatements. Those were recorded in second quarter, third quarter, and fourth quarter and should largely be complete this year. As you talk about sort of a step change function, I think our opportunity is, is we've got roughly about 10% of our fleet coming up for renewal over each of the next three years consecutively and actually between 10% and 12%. So, think about little bit more than 35% or so of our fleet comes up for renewal and I think it's up for us to remain incredibly disciplined as we look at those renewals and push as hard as we can for variable rent. I think percentage rent is something that's really key for us as it's going to be or has been and continue going to be very hard to predict where consumer traffic trends go. So for us as a percentage rent to sales is something that we would really like to push as hard as we can on in order to change that occupancy line item to become more of a variable base than a fixed base. As it relates to SG&A, I think a lot of our SG&A depends on how holiday finishes and our view of the consumer and the channel penetration at that point in time. I think we have honestly consistently shown that we can be nimble and disciplined as necessary. At the same time, you are right, we do believe in the future growth of our brands and our initiatives and we believe it's important to continue to invest in the future in order to grow our business. We always have seen that as the best way to reward our shareholders, as well as our employees. So we will have more commentary on SG&A when we speak on the next quarter call. We have obviously not finished our plans. Like I said, a lot of it will depend on what our current views are on channel penetration at that point in time.

Okay, that's all from our side. We thank you very much for joining us on the call today and we wish you all a very, very Happy Thanksgiving.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect.